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Housing Bears' Concerns Are Overblown, Goldman Sachs Says

Stocks in this article: XHB IYR XLF SPY DIA

NEW YORK ( TheStreet) -- The outlook for the housing recovery has dimmed recently in the wake of a slowdown in sales and new home construction activity following a rise in mortgage rates.

The weakness in the data has reinforced concerns that the housing recovery so far has been fueled by low interest rates and heightened investor activity.

Housing bears point to flat median incomes, low participation of first-time homebuyers and tight mortgage credit conditions as among the many reasons why the strong home price appreciation seen in the past year will not last.

Analysts at Goldman Sachs, however, believe that the concerns, while valid at some level, are overdone.

Here's the main takeaway from their recent report published Monday.

  • There is significant pent up demand. Household formation is below its historical average, suggesting that a return to normal would create significant demand for housing. Of course many households could choose to rent rather than buy.

    But the analysts believe that the decline in homeownership rates is more likely cyclical.

    The homeownership rate among 25-to-44-year-olds is slightly below the average that prevailed between 1985 to 1994, which the analysts believe should be the benchmark for "normal" homeownership rates. Homeownership in this period hovered between 63% and 65% before it began its rise in the 90s and peaked at 69% in 2005.

    If the decline is structural, then homebuyers must either have a shift in their attitudes toward homeownership or they do not have sufficient savings for a home or might fail to qualify for a home loan.

    But a Gallup survey shows that a vast majority of non-homeowners aged 18 to 49 plan to buy a home in the next 10 years.

    Also, looking at the distribution of wealth among 25-to-44-year-old renters with a household income of more than $50,000, Goldman found that nearly 40% had enough savings for a 10% downpayment and closing costs on a $200,000 house.

    Also nearly half of these renters have a debt to income ratio of less than 5%, which means they have the capacity to take on debt. New mortgage regulations stipulate a debt to income ratio of not more than 43%.

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